“Parents’ influence on their children’s understanding of money management begins early…before they even start school.”*

If you’re a parent, your child will invariably show interest in money before you drop them off for their first day of kindergarten. Your kids will undoubtedly be exposed to messages to consume by the time they’re two. This is why I’ve spent the better part of my parental experience advocating that parents begin money-smart lessons as early as possible, even as kids are toddling through the house. Research supports what we do: “the early elementary grades may be a developmentally appropriate time to teach children to resist consumer culture.”* Though toddlers are not developmentally able to fully grasp these concepts, they are being exposed to consumer messages and that means that we must expose them to meaningful, balanced counter-messaging. Think of it as “emergent financial literacy.”**

Three basic money-smart skills that will set your kids on the path to a smarter financial future are:

Making choices is at the heart of our experience with money. We are always making money choices as adults. It’s important that we allow our kids to do the same – with parental guidance. The best way to teach and reinforce these lessons is through actual experience with cold, hard cash. Providing your kids with a structured allowance is a very effective way to accomplish this goal. Although some would cynically label an allowance as a “handout,” when given for the purpose of teaching your kids how to use money properly, it is a noble endeavor.

My parents are wonderful people. Like other parents at the time, they gave us money, called it “allowance” and hoped it might help teach us to become money-smart. Given the limited discourse on youth financial literacy at that time, their approach was actually relatively progressive.

We need to do better today, however.

Don’t give your kids a handout. Be explicit with them about the meaning of an allowance. Just as you wouldn’t allow them to use a saw or razor without guidance, let them know you are providing an allowance so they may learn to use money properly.

My daughters like to ask me about the quality of their spending decisions. Just last week, my teenage daughter talked to me about her desire to buy a Fjallraven Kanken Mini Backpack, which are apparently all the rage. They cost $60 and she could afford to buy one using some of the money she earned earlier in the summer. I shared my thoughts, “You already have two backpacks. Why do you need another?” In a moment of rare thoughtful attention, I told her to keep in mind that my opinion was just that – mine. My value judgements come from oodles of experience (good and bad). We parents want to share our values. Of course, we’d like our kids to adopt our most cherished ones. But our value judgments are not theirs. Giving our kids responsibility over their own money allows them to learn to make their own judgments when the stakes are low and when those same financial mistakes aren’t potentially catastrophic.

Personal experience is the best teacher. Setting up a guided allowance will help your kids begin to understand how to make money-smart choices that will work best for them now and in the future.

2. Needs vs. Wants

Distinguishing between needs and wants is essential to becoming money-smart. It’s also very important to not fall into the trap of “demonizing” wants. Desire is okay. Even Money Mammals are allowed to want things. However, it’s equally important that kids recognize that the money tap is not endless.

For early elementary and even preschool age kids, it’s very easy to play a simple “need vs. want” game at the market. Ask your child to tell you which of the items you’re purchasing are “needs” and which ones are “wants” as you walk around the store. It’s simple and fun and even little kids start to understand these basic concepts very quickly.

It’s also a good idea to explain the unseen decisions that you make. Shelter, food and clothing are three obvious needs that are good for your kids to understand. Teach your children the nuance of what I call “conditional needs.” For example, you need a conveyance to get to work. Your options include walking, biking, taking public transportation or driving your car. You can explain to your kids that the latter might be the best choice, because the other options eat into family time.

It’s also helpful for kids to understand that your purchase of a $27,000 Prius may seem extravagant to them. They didn’t see that you didn’t buy a $45,000 SUV. They also don’t see the money you save with its superior fuel economy. It’s worth a conversation with them about these choices. Of course, you could make arguments for all these conveyances depending on your location. It’s ultimately up to you and your situation. The point here is that you communicate to your kids the “why” behind the choices you are making (especially the big, invisible ones).

Discussing needs and wants pays off. I recall a time when I dropped and shattered my phone. As I quickly cried out my need for a new one, my very proud daughter interjected, with gusto, “You don’t NEED an iPhone, Dad.” Point taken! Once you begin to teach your kids how to be money-smart, they may help keep YOU in line.

3. Saving for a Goal

“Delaying consumption does not drive people to unmitigated self-denial. Rather, it drives them to maximize their happiness, whatever form that takes.” –Happy Money: The Science of Smarter Spendingby Elizabeth Dunn, Michael Norton

Saving for a goal is one of the most powerful skills you can teach your kids. It goes beyond the financial literacy realm. I believe it’s an essential life skill. Life is only truly lived by the dreamers, and dreams are achieved by setting goals.

Research strongly supports training kids to focus on goals early. You’ve likely heard about The Marshmallow Test famously implemented by Stanford researcher, Walter Michel. Children were given a choice between one small immediate reward or waiting a short period of time to get double the reward. You may not know that Mr. Michel did a follow up study on some of those same test subjects many years later. The participants who were able to delay gratification “tended to have better life outcomes, as measured bySAT scores,educational attainment,body mass index (BMI),and other life measures.”*** The long term effects of learning to delay gratification are powerful.

Brain research also supports this approach:

“Executive function of the brain, critical in goal setting and delaying gratification, develops rapidly in the first five years… Research indicates that there are innate individual differences in inhibition that can be influenced during executive function’s rapid development between the ages of 3 and 5… For example, working memory and inhibition together make it possible to keep our savings goals at the front of our mind even while considering a seductive purchase.”*

Need a bit more convincing that it’s important to start early?

Another study “found that parent and teacher reports of child’s self-control between the ages of 3 and 11 is associated with future savings and investment behavior, home and retirement account ownership, and self-reported money and credit management success.”*

Undoubtedly, there is much that is complicated about financial matters. Teaching your kids about money does not have to be. Start with these basics and you’ll be well on your way to raising a money-smart, “money comfortable” kid. If you are interested in learning more about raising money-smart, money -empowered kids, I would highly suggest my newest book, The Art of Allowance. The book is available now for purchase online.